Tag Archives: RRSP

Should You Save For Your First Home in your TFSA or your RRSP?

Posted on by

As my faithful reader (Hi, Dad!) knows, I’ve been working my way through Gordon Pape’s How TFSAs Can Make You Rich. In it, he tries to deal with many of the most common questions about Tax Free Savings Plans, one of which is whether it’s better to save your down payment for your first home in your TFSA or in your RRSP.

Forget Where You Need to Save: Where Do You Need to Buy your First Home?

A close relative lives in a small town in northern Ontario where you can buy a house for about $17,500. The paper mill has closed. The mines closed long ago. There are not a lot of new people coming to town looking to buy.

Another relative, though, lives in the Vancouver area. I believe the monthly payment on her condo mortgage and fees is close to $1,750 given that most single family homes in her area cost about $750,000 now. So she’s spending about $17,500 each year for her home.

Obviously where you have to buy is going to affect how much you have to save.

Let’s Get Realistic: You Need to Save for your First Home in BOTH your TFSA and your RRSP

If you live in one of the real estate war zones you will need a fortune to buy a home. You can try to buy with less but if you do, you will probably end up very stressed and money will be tight. The Globe and Mail wrote about this recently in The rise of the miserable Canadian homeowner.

The most you can take out of your RRSP under the Home Buyer’s Plan is $25,000. If the home you want to buy costs $400,000, that’s only 6.25% of the price.

If you’re 23 or older, then the most you could have saved in your TFSA to the end of 2013 before growth is $25,500. That’s another 6.375%.

Don’t forget on a $400,000 home you may be expected to pay about $10,000 in closing costs. That’s another 2.5% you need to find somewhere.

Closing costs include provincial land transfer taxes, and if you’re in Toronto: municipal land transfer taxes. They also include lawyer’s fees, bank and mortgage fees, title fees, paying back any pre-paid property taxes, paying to start new accounts with utilities, etc.

You do know that you are probably going to have to pay $4000 a year or so each and every year in property taxes, right? Will you have the money for next year’s taxes sitting in the bank after you’ve paid for your home?

I think you need to save for your first home in both your TFSA and your RRSP.

A Purely Numerical Reason to Save for your Home in your RRSP

In his book, Gordon Pape runs some numbers to see if there is a simple financial advantage to saving for your first home in your RRSP or your TFSA. Based on contributing $3500 a year in before-tax income, it works out that you can save the $25,000 for your home in 6 years using a RRSP and in 8 years using a TFSA. (The actual math is a bit complex: check the book if you want the details. And remember he’s assuming you take advantage of the higher rate of contribution to the RRSP because you can use “before tax” money. )

So if your goal is to get a down payment accumulated faster, using the RRSP is the winner.

And if you have to buy in a ghost town in northern Ontario, your RRSP is the perfect place to save the entire purchase price.

For many of the rest of us, though, as I’ve said at least twice before: I think you’ll need to save in both.

Did We Save in Our TFSA or Our RRSP?

We’re ancient. There were no TFSAs when we were saving for our first home. We did, however, save both in our RRSPs and in our regular bank accounts.

Related Reading

Join In
Are you saving for your first home? What strategies are you using to try to get there sooner? Please share your views with a comment.

Can I Use My TFSA as Collateral for a Quick Loan?

Posted on by

Sometimes life happens and a person needs a few thousand dollars in a hurry. They may even have that same few thousand saved up in a Tax Free Savings Account but it’s locked up in a GIC that can’t be cashed until it reaches maturity. The question then is: Can I use my TFSA as collateral for a quick loan?

You Can Not Use RRSP Assets as Collateral for a Loan

If you run into financial problems, your bank cannot seize your RRSP assets, at least until you try to withdraw them, to reclaim what you owe them on a loan. Consequently, no legitimate lender will let you use the value of the assets in your RRSP as collateral for a loan.

What Is Collateral?

(This is not a legal definition just an approximate explanation. If you need more details, please talk to a financial expert or lawyer.)

Collateral is something of value that the bank can claim if you default on your loan by not paying it back. For example, if you have a brand new car which is fully paid off, a bank might allow you to list the car as collateral for a small short-term loan. If you don’t pay the loan back in full with the agreed interest by the payable date, the bank can then take your car, sell it, keep the amount needed to redeem the loan and to recover the costs of forcing them to seize your car, etc, then give you the balance of the value.

Banks prefer cash and investment assets as collateral as they are much easier for them to process than physical goods like cars.

You Can Use the Assets in Your TFSA as Collateral for a Loan

Unlike RRSPs, the assets in your TFSA can be pledged as collateral against a loan.

It’s important to remember, though, that the bank does not *have* to allow you to use your TFSA as collateral. It’s up to them. There is no rule that says they must lend you money.

What Type of TFSA Assets Might Be Acceptable As Collateral?

If your TFSA is invested in cash, the bank would probably suggest you just withdraw the cash and use it instead of getting a loan. In most cases, that would be the sensible solution.

If your TFSA is invested in bonds or GICs, the bank would probably allow you to pledge part of the value of those assets as collateral against a loan. They would likely need proof of the terms, principal and interest rates for the assets. You are most likely to be able to get a loan from the same financial institution that holds your TFSA as it would be easiest for them to keep an eye on their collateral and get access to it if you don’t repay your loan.

If your TFSA is invested in individual stocks, mutual funds or ETFs, it gets trickier. The bank would have to decide how risky it thinks those investments are. For example, in mid-November 2008 TD bank shares were worth about $48 each. By mid-December they were down to about $34 each. The institution making the loan knows these types of market drops can occur anytime without warning. Depending on how risky they rate your investments they may or may not accept them as collateral and they are very unlikely to loan you even 90% of the current value of them.

Borrowing Against Your TFSA to Invest in a Non-Registered Account

In his book, How TFSAs Can Make You Rich, Gordon Pape explains that you might be able to use your TFSA as collateral to borrow money which you could then use to invest in a non-registered account.

He also says “you can deduct interest on a loan against a TFSA if the money is used to invest in a non-registered portfolio, say Gena Katz of Ernst & Young Canada and Jamie Golombek of CIBC Private Wealth Management.”

Mr. Pape also points out that many people who borrowed to invest suffered only increased losses, not gains, caused by the crash of 2008-2009. Leverage can increase earnings but it can also cause devastating losses.

For most people and in most situations, I would not recommend borrowing to invest. (Not that you should ever make any investment decision based on my website. Talk to a financial professional for financial advice, not an engineer/tech writer! I’m only trying to share what I’ve learned not tell you what to do.)

In case you don’t already know, you can not deduct interest for a loan used to invest in your TFSA.

Have I Used my TFSA as Collateral?

So far I’ve never needed a short-term loan. I’m hoping I’ll never need to personally test this information.

Related Reading

Join In
Have you ever used your TFSA as loan collateral? Was it to get out of a pinch or to leverage your portfolio? Please share your experiences with a comment.